Guaranty Trust Bank : The king of efficiency retains its title once again

24 April 2019 :GUARANTY continues to set the efficiency benchmark in the banking space (a trend sustained over the last decade) through “best-in class” cost management and asset utilization. In its FY’18 results, the bank posted strong earnings growth in bottom line, with a y/y uptick of 9.1% and 10.0% in pre-tax and post-tax profits respectively and an EPS improvement of 10.1% from 2017.

Decline in core banking fails to dampen FY’18 performance

Revenue from core banking operations declined by 6.2% y/y with Interest Income of N307.0 billion (FY’17: N327.3 billion). This was driven by a 6.1% y/y reduction in interest income from loans and advances to customers (gross loans contracted by 10.2% y/y to N1.362 trillion) and an 8.2% y/y drop in interest income on fixed income securities. It is noteworthy to mention that the contraction in loans is in tandem with the industry trend (total industry bank loans down 4.0% in 2018 to N15.4 trillion), as banks seek to improve asset quality in a fragile economy.

Non-Interest Income props up profits

GUARANTY overcompensated for the lag in core banking activities with a surge in non-interest income of 39.0% y/y to N127.7 billion in 2018. This was spurred by a 22.0% increase in fees and commission Income. Non-performing loans ratio also improved to 7.3% (FY’17: 7.7%), even as the bank’s cost of risk declined to 0.3% (FY’17: 0.8%). The bank was also able to increase efficiency, with cost to income ratio declining to 37.1% in 2018 (FY’17: 38.9%). In summary, analysts view the bank’s performance as impressive but not superlative given the slight reduction in NIMs in FY’18 to 9.2% (FY’17 10.4%) driven by a of 14.0% increase in the Interest Expense on customers deposits, from N59.6 billion in 2017 to N68.0 billion in 2018. The Banks redemption of the Eurobond in November 2018 moderated overall Interest Expense growth to 5%, from N80.67 billion in 2017 to N84.53 billion in 2018 and improved the Cost of Funds to 3.0% in 2018, from 3.2% in 2017.

Outlook and valuation

Analysts have modelled a 6.0% expansion in loan book for FY’19 versus management guidance of 10%. The Bank disclosed its plans to increase loans with concentration on the Oil & Gas, Manufacturing and Retail categories and in March 2019 introduced a QuickCredit facility to the market targeting salary earners with a monthly rate of 1.75% (3.5% average monthly rate from microfinance institutions). Analysts view this as disruptive and expect other banks to follow suite. Analyst's forward EPS of N7.16 and implied fair value estimate of N46.50 for the bank, presents a potential upside of 33.6% to market price N34.80 and place a BUY recommendation for the stock.